Is Pharmaceutical Product Development the Perfect Stock?

Finding companies that have all the right stuff can produce winners.

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Pharmaceutical Product Development(Nasdaq: PPDI) fits the bill.

The quest for perfectionStocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.

Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.

Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.

Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.

Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.

Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Pharmaceutical Product Development.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

6.6%

Fail

1-Year Revenue Growth > 12%

7.7%

Fail

Margins

Gross Margin > 35%

47.8%

Pass

Net Margin > 15%

9.6%

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

Current Ratio > 1.3

1.52

Pass

Opportunities

Return on Equity > 15%

11.8%

Fail

Valuation

Normalized P/E < 20

26.55

Fail

Dividends

Current Yield > 2%

2.0%

Pass

5-Year Dividend Growth > 10%

64.4%

Pass

Total Score

5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Pharmaceutical Product Development finishes in the middle of the pack with a score of five. Interest in the company is likely to skyrocket in the coming days as speculation of a potential sale of the company has surfaced.

Pharmaceutical Product Development is a great example of a company that does what its name says: It helps drug companies run clinical trials in order to bring new drugs to market. In particular, Merck(NYSE: MRK)entered into an agreement with the company a couple years ago to help conduct late-stage trials of drugs in its pipeline.

Pharmaceutical Product Development isn't the only company to act as what's known as a contract research organization. Both Covance(NYSE: CVD) and Charles River Labs(NYSE: CRL) also do similar work in the industry. But Pharmaceutical Product Development is unique among these rivals in that it pays a dividend -- one that provides both a healthy yield now and has shown some huge growth in recent years.

Just yesterday, the Wall Street Journal reported that the company potentially is looking into selling itself. The news sent shares soaring as investors hope for a buyout premium, but at least so far, no actual buyer has come forward.

Pharmaceutical Product Development has grown only at a modest pace recently, and its net margins and returns on equity are nothing to write home about. But with many big pharma companies looking to expand their pipelines in the coming years, business could easily pick up -- and Pharmaceutical Product Development could get a lot closer to perfection, especially if a buyer recognizes its full potential .

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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